THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE?

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3 THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? Peter Ashford* The last few years have seen the seemingly modest point of the governing law of agreements to arbitrate, exercise the English courts. In agreements to arbitrate it is rarely stated what the governing law of that, separate, agreement, is. There are, in essence, two rival theories: the seat theory that states that the governing law follows the geographical location of the seat of the arbitration provided for, and, secondly, the host theory that states that the governing law of the agreement to arbitrate is the same as the governing (or substantive) law of the contract in which, typically, the agreement to arbitrate is a clause. The modern cases, that are seemingly irreconcilable, are C v. D 1 and Sulamérica Cia Nacional de Seguros S.A. v. Enesa Engenharia S.A. ( Sulamérica ). 2 Two of the modernday commercial colossi in the Court of Appeal, Longmore LJ in C v. D and Moore-Bick LJ in Sulamérica, are plainly at odds. In Arsanovia Ltd & Ors v. Cruz City 1 Mauritius Holdings 3 ( Arsanovia ), Andrew Smith J grappled with the tensions between, and questions left unanswered in, the two Court of Appeal cases. As Andrew Smith J, rather politely observed in Arsanovia, it is impossible not to detect in the judgment of Moore- Bick LJ that he was uncomfortable with the reasoning of Longmore LJ. This article aims to make the analysis a little more comfortable. The importance of the governing law of the arbitration agreement is that it will determine questions as to formation (including special considerations concerning questions of disputed incorporation), validity (and conversely illegality or invalidity), effect or construction and discharge of that agreement to arbitrate. 4 These will often be significant battlegrounds. Before embarking on further consideration it is, firstly, worth noting several uncontroversial propositions (at least in English law): * International Arbitration Partner, Fox Williams LLP, London; FCIArb. 1 [2007] EWCA (Civ) [2012] EWCA (Civ) [2012] EWHC (Comm) Of course, the agreement to arbitrate is typically a bilateral agreement between the original contracting parties. On the appointment of the tribunal a trilateral agreement comes into being between the original contracting parties and the tribunal. As ever, it is open to the parties (and tribunal) to agree a yet further law might govern that agreement, but absent such an express choice there is no debate that it will be governed by the same law as the original agreement to arbitrate. 469

4 470 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 Every arbitration must have a juridical home ; 5 If not expressly referred to as a seat, the geographical place of an arbitration is its seat or juridical home ; 6 If not expressly provided otherwise, the procedural or curial law will be that of the seat; 7 The agreement to refer disputes to arbitration, albeit typically a clause in a host contract, is a separate agreement; 8 and The law that applies to arbitration agreements is not governed by the Rome Convention. Secondly, it is worth having in mind the historical evolution of the law on two key aspects: (a) in relation to the proper law of the arbitration agreement, and (b) in relation to the separability of the arbitration agreement. Both of these reached maturity at about the same time, in the 1990s, but having taken separate paths. It is the bringing together of the two strands that is crucial to a proper understanding of this article. In each of C v. D, Sulamérica and Arsanovia there were governing law clauses for the substantive contract so the host theory could be argued. It is perhaps instructive to consider the position had there been no governing law clause. The position is clearly set out in Star Shipping AS v. China National Foreign Trade Transportation Corp. (The Star Texas). 9 The case concerned a charter for a ship. The arbitration clause provided for disputes to be referred to 5 Bank Mellat v. Hellinki Techniki, [1984] 1 QB 291, 301 and Amin Rasheed Shipping Corp. v. Kuwait Insurance Co., [1984] AC 50, The fixing of a venue (albeit with a different governing substantive law) will usually be a designation of the seat: an arbitration clause which provides for arbitration to be conducted in accordance with the Rules of the ICC in Paris (a supranational body of rules), a provision that the venue of the arbitration shall be London... does amount to the designation of a juridical seat. The parties have not simply provided for the location of hearings to be in London for the sake of convenience and there is indeed no suggestion that London would be convenient in itself, in the light of the governing law..., the nature and terms of that agreement and the nature of the disputes which were likely to arise and which did in fact arise. Shashoua v. Sharma, [2009] 2 Lloyd s Rep (even though the governing substantive law was Indian) and see also Union of India v. McDonnell Douglas Corp., [1993] 2 Lloyd s Rep. 48; note also Naviera Amazonica Peruana S.A. v. Cie. Internacional de Seguros del Peru, [1988] 1 Lloyd s Rep. 116, 121 (the legal seat of the arbitration will remain the same even if the physical location of certain hearings move from place to place as a matter of convenience). 7 Whitworth Street Estates v. Miller, [1970] AC 583, 607, 609, 612, Harbour Assurance Co (UK) Ltd. v. Kansa General International Insurance Co Ltd., [1993] 1 Lloyd s Rep. 455; Arbitration Act 1996, s.7 and Fiona Trust v. Privalov, [2007] 4 All E.R This is also the law of the U.S.: Prima Paint Corp. v. Flood & Conklin Mtg. Co., 388 U.S. 395, (1967) (finding that separability stems from the Federal Arbitration Act, 9 USC 4). 9 [1993] 2 Lloyd s Rep. 445.

5 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 471 arbitration in Beijing or London in defendant s option 10 and there was no governing law clause. Lloyd LJ said: Where the arbitration clause provides for a single situs... [t]he arbitration clause then provides a strong, although not conclusive, indication of what the parties intended as the proper law of the contract, including the arbitration agreement.... The presumption cannot operate if no place of arbitration is agreed I. THE QUESTIONS THAT DETERMINE GOVERNING LAW The questions that have to be answered, and which cannot seriously be doubted in light of Sulamérica and many earlier authorities, 12 is whether the parties expressly, or impliedly, chose a law applicable to the arbitration agreement. 13 If they did the Court gives effect to that choice. If they made no choice the Court identifies the system of law with which the arbitration agreement has its closest and most real connection. II. THE SEAT THEORY The argument in favor of the seat theory is simple and generally focused on the closest and most real connection. Certainly that appears to be the basis put forward by Longmore LJ in his obiter comments and he said, The reason is that an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate than with the place of the law of the underlying contract in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place Id. at Id. at See Amin Rasheed, supra note The English Courts led the way in developing party autonomy as the basis for choice of law. The developments can be traced back to Robinson v. Bland, (1760) 1 Bl. W. 257, 259 and any debate was put to rest in Whitworth Street Estates, [1970] AC at 603. The view in the U.S. is that in the absence of a choice of law by the parties, the applicable law is the law that has the most significant relationship to the transaction and the parties. RESTATEMENT (SECOND) OF CONFLICT OF LAWS, 188. The basic principle of party autonomy was enshrined in the Rome Convention and represented the law in all EU Contracting States and applies in most other countries. 14 [2007] EWCA (Civ) at 26.

6 472 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 III. THE HOST THEORY The arguments in favor of the host theory can be broadly summarized as follows: Construction: the reference to a system of law governing a contract means the entire contract (including the arbitration clause). This found favor with Andrew Smith J in Arsanovia and earlier cases have taken the same view. 15 The counter-argument is that the arbitration agreement is a separable agreement and must be considered separately from the host contract, and the counter to the counter is that it is not necessarily separable for all purposes. Neither C v. D nor Sulamérica seriously advances or discusses this argument and it is suggested that it runs so counter to modern orthodoxy on separability that it has little future. Consistency: the governing law of the substantive agreement and the arbitration clause should be the same, save in exceptional cases. The high watermark of the consistency argument is Lord Mustill in Channel Tunnel Group Ltd v. Balfour Beatty Ltd 16 and that it would be exceptional for the law governing the agreement to arbitrate to be different from the substantive law. The cases that are said to support or illustrate the application of the Channel Tunnel principle, include Union of India v. McDonnell Douglas, 17 but with regard to the law of the arbitration agreement (the case also considers the procedural or curial law) it is really an application of the construction principle: The parties may make an express choice of law to govern their commercial bargain and that choice may also be made of the law to govern their agreement to arbitrate. In the present case... the parties have chosen the law of India not only to govern the rights and obligations arising out of their commercial bargain but also the rights and obligations arising out of their agreement to arbitrate. 18 That is the extent of the reasoning and it fails for the reasons given above on construction. Sumitomo Heavy Industries Ltd v. Oil & Natural Gas Commission 19 is another case, as is Sonatrach Petroleum Corp v. Ferrell International. 20 The comments in Sumitomo were obiter and again essentially amount to a construction argument. Sonatrach restates the reasoning without adding to it but contains a useful summary of the host theory: Where the substantive contract contains an express choice of law, but the agreement to arbitrate contains no separate express choice of law, the latter agreement will normally be governed by the body of law expressly chosen to govern the substantive contract. 15 See, e.g., Union of India, supra note [1993] AC 334, [1993] 2 Lloyd s Rep. at Id. 19 [1994] Lloyd s Rep. 45, [2002] 1 All E.R. (Comm) 627 at

7 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 473 The proponents of the host theory criticize the C v. D seat theory on the basis that the closest and most real connection does not point to the seat for two additional reasons. Firstly, the connection between the arbitration agreement and the seat are more readily expressed through the procedural or curial law rather than the governing law. Whilst undoubtedly correct that the agreement to arbitrate and the curial law have a close connection, it does not follow that there cannot also be a close connection between the seat and the governing law of the agreement to arbitrate. Secondly, multi-tiered dispute resolution clauses (which are becoming increasingly popular) providing, for example, for mediation in advance of any arbitration, make it important that substantive rights, as opposed to procedural matters, are governed by one system of law. Again, this is a valid argument but it should not impact of the analysis of the law of the arbitration agreement merely because there is a yet further agreement to mediate. IV. C v. D AND SULAMÉRICA In neither C v. D nor Sulamérica did the Court find there to be a choice by the parties (whether express or implied) and in both cases the Court found the law of the arbitration agreement by the application of the closest and most real connection test. 21 Both cases also acknowledged the fine line between an implied choice and closest and most real connection. 22 C v. D concerned the Bermuda form, which has a New York governing law clause and a London seat. Longmore LJ gave the only reasoned judgment and held by choosing London as the seat of the arbitration, the parties must be taken to have agreed that proceedings on the award should be only those permitted by English law 23 and a choice of a seat for the arbitration must be a choice of forum for the remedies seeking to attack the award. 24 Obiter, he posed the question, if there is no express law of the arbitration agreement whether the law with which the agreement has its closest and most real connection is that of the host contract or the seat. 25 He considered that the answer is more likely to be the law 21 This test was adopted in Bonython v. Commonwealth of Australia, [1951] AC 201, 219. The same concept had been expressed as objective presumed intention. See, e.g., Lloyd v. Guibert, ( ) L. R. 1 QB And it was not novel to do so. It had been recognized in Amin Rasheed, [1984] AC at 61. In practice the same result could usually be achieved by the application of the implied choice or closest and most real connection: the tests had in effect merged: id. at 69. For example, in Armadora Occidental S.A. v. Horace Mann Insurance Co., [1977] 1 W.L.R. 520, the judge decided by the implied choice and the Court of Appeal affirmed the result but on the closest and most real connection test. [1977] 1 W.L.R. 1098, [2007] EWCA (Civ) at Id. at Id. at 22.

8 474 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 of the seat Longmore LJ relied upon Mustill J s observation in Black Clawson International v. Papierwerke Waldhof-Aschaffenburg 27 : In the great majority of cases, [the lex causae, the law applicable to the arbitration agreement, and the lex fori] will be the same. Sulamérica was also an insurance case and had a Brazilian governing law clause and a London seat. The main judgment was given by Moore-Bick LJ. He was critical of Longmore LJ proceeding directly from finding no express choice to closest and most real connection without first considering implied choice. Moore-Bick LJ said that the express choice of Brazilian law for the host contract was a strong pointer towards an implied choice of the law of Brazil as the proper law of the agreement [to arbitrate]. 28 But it is important to note that the pointer was not sufficient for Moore-Bick LJ to find an implied choice in light of the choice of the London seat with the inevitable acceptance 29 of English law to govern the conduct and supervision of the arbitration coupled with a peculiarity of Brazilian law that required consent to enforce the arbitration agreement. These latter factors outweighed the pointer and notwithstanding the presumption that the parties must be taken to have intended one law to govern their relationship. Finally, Moore-Bick LJ relied upon Lord Mustill s statement in Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. 30 that it was only exceptionally that the governing law of the host contract differed from that of the agreement to arbitrate. Of course, this statement was from the same Mustill J who had said completely the opposite in Black Clawson. Lord Neuberger MR gave a short judgment and rejected the possibility of treating Longmore LJ s obiter dicta in C v. D as wrong and held that there were two options: to follow C v. D or accept that there are sound policy reasons to accept either the host theory or the seat theory. As both gave the same result, he found it was unnecessary to decide between them. The facts of Arsanovia concerned a slum clearance project in Mumbai, India. There were two relevant agreements but both were in materially identical terms so far as law and dispute resolution were concerned and both were made on the same day in June The arbitration agreement provided for arbitration under the LCIA Rules, a seat in London and a negative application of parts of the Indian Arbitration and Conciliation Act 1996 (i.e. the parties agreed not to seek interim relief under the Indian Act). Both agreements were governed by Indian law. 26 Id. 27 [1981] 2 Lloyd s Rep. 446, [2012] EWCA (Civ.) at Id. 30 [1993] AC 334 at

9 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 475 V. EXPRESS CHOICE Neither the Court of Appeal in C v. D nor in Sulamérica considered there to be an express choice. Although it was not submitted to him, in Arsanovia the judge thought it would have been open to submit that there was an express choice. His reasoning was that the governing law clause provided that This agreement was governed by Indian law. C v. D and Sulamérica had clauses referring to the or this policy. Andrew Smith J reasoned that the reference to policy was more naturally related to the insurance aspects rather than the agreement to arbitrate and reference to the agreement was apt to include all clauses in the host contract including the agreement to arbitrate. 31 Notwithstanding that approach it is perhaps still necessary to have a true express choice 32 in the same manner as the governing law of the host contract is chosen. 33 The Star Texas reasoning discussed under implied choice below would also seem to be fatal to this line of argument for express choice. VI. IMPLIED CHOICE The retrospective focus of the analysis of C v. D has been on Longmore LJ s obiter comments (quoted above). The ratio (also quoted above) contains the words must be taken to have so agreed and a choice of seat... must be a choice of forum... both of which appear to indicate that the ratio was that there had been an implied choice albeit that it is clear that it was on the closest and most real connection. This just illustrates the near merger of the tests. The highpoint of the implied choice argument in favor of the host theory is Moore-Bick LJ s pointer, powerful factors, natural inference or strong indication that the express choice of the governing law of the host contract is an implied choice of the agreement to arbitrate. On the facts, these indications were displaced by the London seat and a peculiarity of Brazilian law that would have rendered the agreement to arbitrate nugatory. It is unclear from Moore-Bick LJ s judgment whether a London seat alone would have been sufficient, but presumably not. The facts of Sulamérica have a similarity with 31 This view derives some support from ABB Lummus Global Ltd. v. Keppel Fels Ltd., [1999] 2 Lloyd s Rep. 24, 35: A better view seems to me to be that... the parties agreed that the whole contract, including the arbitration agreement, should be governed by... English law. Thus, the proper law of the whole contract, including the arbitration agreement, was English law. However, this is not a finally concluded view and may, indeed, be a matter for the arbitrators. And see Union of India, supra note This is normally by reference to words such as governed by to be construed in accordance with or subject to. 33 In that event the choice is conclusive : R v. International Trustee, [1937] AC 500, 529 and where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible, provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy. Vita Food Products Inc. v. Unus Shipping Co. Inc., [1939] AC 277, 12.

10 476 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 Hamlyn & Co v. Talisker Distillery 34 : an arbitration clause in a contract between an English company and a Scottish company referred to arbitration by members of the London Corn Exchange. The House of Lords found the arbitration agreement governed by English law on what we would now call the seat theory and on the basis that it would be inoperable if Scottish law applied. However, to find an implication merely by a substantive governing law clause would generally run contrary to express Court of Appeal authority. Steyn LJ (as he then was) in The Star Texas 35 considered carefully the possibility of implication: 36 It is necessary to pause to consider what kind of implication is under consideration. I have not understood... [it to be submitted] that it can be inferred that the Norwegian charterers and the Chinese owners had an actual common intention to select a floating proper law. That is not surprising: one would not expect it to be a subject of conversation among shipping people in the suburbs of Oslo and Beijing. It would in my respectful view be preposterous to imagine that those parties would have considered such an obscure concept. 37 The judge then referred to House of Lords authority on (a) implied terms to give business efficacy (implication in fact) and (b) implied terms as a necessary incident of a contractual relationship (implication by law) and continued to reject the possibility of a term implied in fact: the simple answer is that the arbitration agreement is entirely workable without the implication. The implication is not necessary. 38 The judge then explored another way of approaching the matter, namely that the implication arose out of a constructional implication from the arbitration clause itself which was more correctly viewed as implication by law: Such an implication is... contrary to the general approach of our law... It is clear from Compagnie Tunisienne that even an express choice of jurisdiction does not by itself give rise to an implied choice of law. It may do so together with other factors. But more realistically it will play an important role in the next inquiry, that is the determination of the system of law with which the contract has the closest connection [1894] AC [1993] 2 Lloyd s Rep It should be recalled that the arbitration clause provided for one of two geographical locations at the defendant s option and the question was whether the arbitration agreement was governed by an ascertainable proper law. The Court rejected the argument that an express choice of forum amounted to an implied choice of applicable law and the argument continued as to whether an implied intention could be gathered from the contract as a whole and the surrounding circumstances. 37 The Star Texas, [1993] 2 Lloyd s Rep. at Id. 39 Id. at 452.

11 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 477 As has been seen above, the judge in Arsanovia was plainly attracted by the host theory and came close to finding an express choice based on that. Ultimately he decided on an implied choice by the combined effect of the host theory and the wording of the arbitration agreement that provided: LCIA Arbitration. Any dispute... shall be referred to and finally settled by arbitration under the [LCIA] Rules ( Rules )... The seat or legal place of the arbitration shall be London, England.... Notwithstanding the above, the Parties hereto specifically agree that they will not seek any interim relief in India under the Rules or under the Arbitration and Conciliation Act, 1996 (the Indian Arbitration Act ), including Section 9 thereof. The provisions of Part 1 of the Indian Arbitration Act are expressly excluded. 40 The negative application of the Indian Act was held to be an implication that but for Part 1 of the Act, it, and indeed Indian law as a whole, applied. For the reasons discussed below 41 that reasoning seems flawed. VII. CLOSEST AND MOST REAL CONNECTION In C v. D and Sulamérica, the Court of Appeal applied the closest and most real test and concluded that the law of the arbitration agreement was English: in accordance with the seat theory. Had the point been relevant in Arsanovia, Andrew Smith J would also have found English law on the C v. D seat reasoning. It appears clear that if there is no express or implied choice the seat reasoning will, therefore, prevail in the vast majority of cases as it seems that the judges are agreed that the arbitration agreement has the closest and most real connection with the seat rather than the host contract. VIII. WHERE THE DEBATE RESTS Ignoring Andrew Smith J s construction of agreement against policy (which, it is suggested, is a fussy distinction of a kind deprecated in Fiona Trust v. Privalov 42 ) it is clear that the real scope for future debate, and one which the Court of Appeal (or Supreme Court) must resolve, is what amounts to an implied choice. For the future, clear drafting by making an express choice of law is clearly desirable. The answer, it is suggested, is to be found in (a) the New York Convention and UNCITRAL Model Law, and (b) established private international law relating to implied choice of law. 40 [2012] EWHC (Comm) 3702, See note 56 infra. 42 [2007] UKHL 40, 27.

12 478 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 IX. NEW YORK CONVENTION/MODEL LAW Longmore LJ s ratio in C v. D was that by choosing London as the seat of the arbitration, the parties must be taken to have agreed that proceedings on the award should be only those permitted by English law and the choice of seat for the arbitration must be a choice of forum for remedies seeking to attack the award. 43 It is respectfully suggested that Longmore LJ was plainly correct to so hold, although he does not really explain in his judgment why that is the case. It may have been obvious to the parties and the Court why that was the case but it can be supported by being perfectly in accordance with the New York Convention and the Model Law. Under the Model Law an action for setting aside an award may only be brought in respect of an award made within the territory of the state concerned. It must be brought before the designated court of that state and it may only be brought on the grounds set out in the Model Law. These grounds are taken from Article V of the New York Convention ( NYC ). There is a consistency: the NYC, in Article V, sets out the grounds on which recognition and enforcement of an international award may be refused and Article 34 (and 36) of the Model Law sets out the same grounds (albeit with slight differences of language) as the grounds on which such an award may be set aside. The consistent feature is that the venue for these challenges is the seat of the arbitration. Article V(1)(e) of the NYC provides that an award can be set aside by a competent authority of the country in which, or under the law of which, that award was made. Article 36(1)(a)(v) of the Model Law has, for all practical purposes, identical language. The ability to set aside therefore generally rests in the courts where the award was made i.e. the courts of the seat. There is a theoretical 44 exception: if the parties chose a procedural law other than that of the location where the arbitration is held. The Model Law (of course, this is, in practice, the laws of the jurisdiction where the seat is located so, for example, the Arbitration Act 1996 in England) will be the curial law of the arbitration. The curial law governs the relationship between the parties, the arbitral tribunal and the supervising courts. It will govern, for example, the constitution of the tribunal, its entitlement to rule on its own jurisdiction, and the grounds of challenge to the jurisdiction of the arbitral tribunal on the substantive award. All this amounts to at least a primary jurisdiction vested 43 Id. at 16 and ALBERT JAN VAN DEN BERG, THE NEW YORK ARBITRATION CONVENTION OF 1958: TOWARDS A UNIFORM JUDICIAL INTERPRETATION 284 (1981) (in none of the cases under the NYC have the parties designated a law of procedure foreign to that of the place of the arbitration; and he suggests, sensibly, that this provision should be regarded as a dead letter ).

13 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 479 in the courts of the seat. 45 If therefore, there were a London-seated arbitration, any attempt to set aside the award should be to the courts of England. The challenges permitted are often of a due process nature and include that the arbitration agreement is not valid under the law to which the parties have subjected it 46 ; the award... contains decisions on matters beyond the scope of the submission to arbitration, 47 and the arbitral procedure was not in accordance with the agreement of the parties. 48 Take the situation of a London seat and Indian governing law (not unusual in the cases discussed above). There is a challenge arising from the jurisdiction of the arbitral tribunal. The London seat dictates that English law is the curial law. The arbitral tribunal s power to rule on its own jurisdiction derived from the Arbitration Act 1996 and the challenge is also on the grounds permitted under that Act. The English court will consider these issues, therefore, from an English perspective. The governing law of the agreement to arbitrate will, however, determine the actual jurisdiction of the arbitral tribunal as the effect or construction of the agreement to arbitrate, is a matter for the governing law of that agreement. It is suggested that the NYC and the Model Law must presuppose that the courts of the seat will, in the vast majority of cases, apply the law of the seat (i.e. as both the curial law and the governing law of the agreement to arbitrate) to all issues concerning, for example, questions of due process. It would be bizarre and anachronistic for challenges on the award to be mandated to be in England, to have English law determine the ability of the arbitral tribunal to rule on its own jurisdiction and the grounds of that challenge also to be subject to English law, and yet have the principal issue of the jurisdiction of the tribunal to be under a law other than England s. Nobody would devise such a system. If, therefore, challenges in England as to due process concerning the effect or construction of the agreement to arbitrate are logically under English law it follows that the governing law of the agreement to arbitrate must be English law. Thus, save in exceptional circumstances and absent express choice, there is a powerful argument that there should be an implied choice that the governing law of the agreement to arbitrate is the same as that of the seat. If the choice is not implied, then it is sufficient to displace other pointers towards the host theory such that there is no implied choice. As illustrated above, if the fallback is to the closest and most real connection, the seat theory will usually prevail. 45 U&M Mining Zambia Ltd. v. Konkola Copper Mines plc., [2013] EWHC (Comm) 260, at 64. ( The courts of the seat will have the sole supervisory and primary supportive function in relation to the conduct of the arbitration. ). 46 Model Law, Art. 34(2)(a)(i). 47 Id. Art. 34(2)(a)(iii). 48 Id. Art. 34(2)(a)(iv).

14 480 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 X. PRIVATE INTERNATIONAL LAW Article 3(1) of the Rome Convention provides that the choice of law by the parties must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. The Giuliano-Lagarde Report 49 says that this recognizes the possibility that the Court may, in the light of all the facts, find that the parties have made a real choice of law although this is not expressly stated in the contract but it does not permit the court to infer a choice of law that the parties might have made where they had no clear intention of making a choice. The Giuliano-Lagarde Report gives a number of examples of implied choice. All are, fairly plainly, drawn from English common-law cases. The report states, In some cases the choice of a particular forum may show in no uncertain manner that the parties intend the contract to be governed by the law of that forum, but this must always be subject to the other terms of the contract and all the circumstances of the case and the report adds that [o]ther matters that may impel the court to the conclusion that a real choice of law has been made might include... the choice of a place where disputes are to be settled by arbitration in circumstances indicating that the arbitrator should apply the law of that place. Of course, it must be remembered that the Rome Convention and the Giuliano-Lagarde Report have no direct bearing and are, at best, of persuasive effect only. Nevertheless, they do reflect an international consensus and due regard ought to be had to that learning. Moreover, it was once thought that an arbitration clause raised an irresistible inference to the effect that the seat dictated the choice of law for the arbitration agreement. 50 That strictness has been abated to weighty indication or strong inference by Compagnie Tunisienne de Navigation SA v. Compagnie d Armement Maritime SA. 51 The weight therefore given to the pointers towards an implied choice by having an arbitration clause with a named seat might be thought to, at least, balance out the factors identified by Moore-Bick LJ in Sulamérica as pointing to an implied choice of the governing law of the host contract. There are some cases that indicate that merely stipulating a geographical seat without also stipulating that the arbitrators will be chosen from among the jurists or businessmen of that seat lessens the implication. 52 The more modern approach 49 Mario Guiliano & Paul Lagarde, Report on the Convention on the Law Applicable to Contractual Obligations, 1980 O.J. (C 282) 1. The report by Professors Giuliano and Lagarde was published with the Convention and has a special status in the interpretation of the Convention. 50 Tzortzis v Monark Line AB, [1968] 1 W.L.R. 406, 413 (CA). 51 [1971] AC 572, 596, 604. Interestingly, the case was cited in C v. D but not Sulmérica (although C v. D was, of course, cited in Sulmérica and C v. D refers to the case, C v. D does not have citations from it). 52 N.V. Kwik Hoo Tong Handel Maatschappij v. James Finlay & Co., Ltd., [1927] AC 604; The Njegos, [1935] All ER Rep. 863; N.V. Vulcaan v. A/S J. Ludwig Mowinckels Rederi, [1938] 2 All E.R. 152, 156.

15 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 481 is more consistent, as would be expected, with the truly international nature of modern arbitration and places less weight on the nationality of the arbitral tribunal. 53 Occasionally, there will be some reference to a foreign law or aspects of foreign law. There is a clear difference between the choice (whether express or implied but here we are likely to be considering an express choice) or reference to a system of law to govern a relationship on the one hand, and incorporation of some provisions of a system of law as a term of the contract on the other hand. This distinction is recognized in the Rome Convention. It is, of course, open to parties to agree that a particular part of their relationship is governed by a particular system of law (perhaps different from the governing substantive law). In such a case the foreign system of law becomes a source of law upon which the governing law may draw. 54 The effect is not to make the foreign law referred to, the governing law of the contract but rather to incorporate the foreign law as contractual terms into the governing law contract. This is simply a route of convenient shorthand 55 and the foreign law has effect only as a matter of contract, but like all contractual terms it must be sufficiently certain i.e. the parties must have sufficiently identified the provisions of the foreign law that are to be incorporated. An illustration of this concept at work is Union of India v. McDonnell Douglas Corp. 56 The facts concerned services to launch a space satellite. The arbitration agreement provided for a London seat and for it to be conducted in accordance with the procedure in the Indian Arbitration Act There was an Indian governing law clause and the question for the Court was to determine the law governing the arbitration proceedings. Saville J held that: [T]here can be no question in this case [where there is an express choice of London seat] that the English Courts would be deprived of all jurisdiction over the arbitration... the choice of a procedural law different from the law of the place of the arbitration will... necessarily mean that the parties have actually chosen to have their arbitral proceedings at least potentially governed both by their express choice and by the laws of this country. Such a state of affairs is clearly highly unsatisfactory... there is a way of reconciling the phrase [ conducted in accordance with the procedure ] with the choice of London as the 53 Indeed the modern trend is away from arbitrators being jurists of the law of the seat and in favor of a truly international make up. Institutional rules positively favor this: e.g. LCIA RULES, Art. 6 and ICC RULES, Art An example is Amin Rasheed, supra note 5. In that case there was evidence that the definitions used in the (English) Marine Insurance Act, to which the standard Lloyd s policy was scheduled, were used as a source of law in this sense by continental courts. 55 See, e.g., Stafford Allen & Sons Ltd. v. Pacific Steam Navigation Co., [1956] 1 W.L.R. 629 (CA) and Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC [1993] 2 Lloyd s Rep Id. at 49.

16 482 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 seat... namely by reading that phrase as referring to the internal conduct of the arbitration as opposed to the external supervision of the arbitration by the Courts. 58 The judge accepted that the consequence was that only very limited parts of the Indian Act would apply: the parties have chosen English law as the law to govern their arbitration proceedings, while contractually importing from the Indian Act those provisions of that Act which are concerned with the internal conduct of their arbitration and which are not inconsistent with the choice of English arbitral procedural law. The Giuliano-Lagarde Report also discusses references to parts of a foreign law. It concludes that it is possible that a partial reference to foreign law indicates either reference or incorporation: where parties have chosen a law to govern only part of the contract there should be no presumption that that law was intended to govern the contract in its entirety. Where there is a partial choice, recourse should be had to the closest and most real connection test. This would seem an entirely logical approach. If the parties have, for example, chosen a foreign Act (as opposed to foreign law) to apply, it must be presumed that the choice is deliberate: they could have chosen the entire foreign law to apply but did not they consciously adopted only part of that law: a particular Act. The negative application of the Indian Act in Arsanovia is surely more consistent with and for the avoidance of doubt neither party will make an application under Part 1 of the Indian Act than Indian law applies save for this part of the Act both as a matter of construction and context. 59 The same would apply if, for example, the parties said that any compensation payable under clause X shall be ascertained in accordance with the laws of country Y. There is, therefore, usually no implied choice by a partial reference to a foreign law. 58 Id. at It will be recalled that the agreements in Arsanovia were in June In 2002, the Indian Supreme Court had decided in Bhatia International v. Bulk Trading S.A., (2002) 4 S.C.C. 105 that Part 1 of the Indian Arbitration and Conciliation Act 1996 applied to arbitrations that did not have an Indian seat. That decision was widely criticized and was overruled in 2012 by the Balco decision (Bharat Aluminium Co. v. Kaiser Aluminium Technical Service Inc., Civil Appeal No of 2005, available at (albeit only prospectively an aspect of the Balco decision that has also been widely criticized). In light of Bhatia it is entirely unsurprising that the parties, by contract, expressly excluded the right to apply under the Indian Act. However, Andrew Smith J disagreed with the Bhatia explanation. He considered that having expressly excluded a provision the natural inference is that they understood and intended that otherwise that law would apply. [2012] EWHC (Comm) 3702, 20. Further, the notwithstanding the above in the Arsanovia arbitration clause logically applies only to the seat and hence both the curial law and the governing law of the arbitration (i.e. English) and not the substantive governing law which was below (i.e. in a following clause).

17 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 483 XI. ALTERNATIVE THEORY SUBSTANTIVE RULES Out of completeness, mention should be made of the approach of the French courts, which is to apply substantive rules independent of any applicable laws. The theory proceeds on the assumption that the agreement to arbitrate is autonomous and independent of the host contract (consistent with the separability doctrine) and from any national legal system. Clearly the former assumption is valid but the latter is, with respect, plainly not correct. Agreements to arbitrate are plainly not independent from legal systems and simply because the search for the appropriate legal system might not be straightforward it is no excuse to abandon the search. Admittedly, under the substantive rule the existence and validity of the agreement to arbitrate are assessed subject to mandatory rules of the seat, which appears to be an acknowledgement of the seat theory, but subject to those mandatory rules, on the basis of the parties common intention, the parties legitimate expectations at the time of the agreement and principles of good faith. Whether this is so different from the closest and most real connection (the English test) or the most significant relationship to the transaction and the parties (Restatement 188) must be debatable. XII. INTERNATIONAL PERSPECTIVE The approach taken in other jurisdictions seems to tend towards finding the law of the seat to be the appropriate law governing the arbitration agreement. In Bulgarian Foreign Trade Bank Ltd v. A.I. Trade Finance Inc., 60 the Swedish Supreme Court held that the arbitration agreement was governed by Swedish law, being the law of the seat of arbitration. That was so even though the host contract, containing the arbitration agreement as a clause, was governed by Austrian law. The Supreme Court held that, as there was no provision concerning the applicable law of the arbitration agreement, the issue of the validity of the arbitration clause should be determined in accordance with the law of the place in which the arbitration took place. In Matermaco SA v. PPM Cranes Inc., 61 the Tribunal de Commerce in Brussels held that questions of arbitrability were to be decided under the law of the place of arbitration (Belgium), rather than the law of the host contract (Wisconsin law). The position in the U.S. takes a different route. Where the seat is in the U.S., the Federal Arbitration Act 1925 (the FAA ) controls arbitrations involving interstate or foreign commerce and maritime transactions: such terms being very broadly defined and hence almost all commercial arbitration agreements that involve transactions connected to the U.S. are subject to the FAA. The scope of the FAA is such that it appears, of itself, to constitute the law governing the 60 XXVI Y.B. COM. ARB. 291 (2001). 61 XXV Y.B. COM. ARB. 673 (2000).

18 484 THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION [Vol. 24 arbitration agreement. 62 This might be thought to be the ultimate extension of the seat theory, but where the parties have expressly chosen a governing law of the host contract (or the arbitration agreement) that law will, generally, be applied 63 alongside the FAA. In Graves v. BP America, Inc., 64 the FAA was held to govern questions of arbitrability once it had been established that there was a valid agreement to arbitrate determined under the substantive law governing the host contract. If parties have made no express choice, then the courts of New York apply conflicts of law principles to determine the relevant substantive law that will be used to supplement, when necessary, the FAA. 65 The New York approach is an interest analysis which seeks to apply the law of the jurisdiction that has the greatest interest in the outcome of the dispute: 66 this considers the domicile of the parties, the place of execution of the agreement and the place of performance, among other factors. Due to the international nature of arbitrations, the commonality of laws based on Model Law and the near universal application of the NYC, it is plainly in the interests of consistency and certainty to have an international consensus for this issue. XIII. CONCLUSIONS A genuine express choice will be rare (although it is hoped that draftsmen will, for the future, make express provision) and in light of Compagnie Tunisienne 62 The FAA constitutes federal substantive law. JSC Surgutneftegaz v. President and Fellows of Harvard College 2005 WL (SDNY August 3, 2005) and requires supplementing where there is no substantive law on the point. E.g., Chelsea Square Textiles Inc. v. Bombay Dyeing and Mfg. Co. Ltd., 189 F.3d 289, 295 (2d Cir. 1999). 63 See, e.g., Telenor Mobile Communications AS v. Storm LLC, 584 F 3d 396, 411 (2d Cir. 2009), subject to two exceptions where it is sought to apply the arbitration (award) against a non-party and where the chosen law is more adverse to arbitration than the policy embodied in the FAA. Thus, if the parties chose New York state law, the Courts apply substantive New York law to general contractual interpretation while ignoring the less arbitration friendly aspects of New York law. Mastrobuono v. Shearson Lehman Hutton Inc., 514 U.S. 52, 63 (1995); see also Volt Inf. Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468, 476 (1989) (federal law may also yield to state law, in this case Californian law, where the state s law better furthers the federal policy towards favoring arbitration ) F.3d 221, (5th Cir. 2009) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985)). See also Pedcor Mgt. Co. Inc. Welfare Benefit Plan v Nations Personnel of Texas, 343 F.3d 355 (5th Cir. 2003); Milos Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266 (9th Cir. 2002) and Chloe Z Fishing v. Odyssey Re, 109 F.Supp.2d 1236 (S.D. Cal. 2000). 65 See, e.g., Progressive Casualty Insurance Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, (2d Cir. 1993). 66 Intercontinental Planning Ltd. v. Daystrom, Inc., 24 N.Y.2d 372, 382 (1969).

19 2013] THE LAW OF THE ARBITRATION AGREEMENT: THE ENGLISH COURTS DECIDE? 485 and The Star Texas, any thoughts of an express choice by the parties having stipulated an express choice of governing substantive law of the host contract, should be consigned to an interesting but ultimately misconceived thought process. Cases of implied choice ought to be rare. The implication must clearly arise from the wording of the entire agreement itself or the surrounding circumstances. Again, The Star Texas ought to rule out most thoughts of implied choice and it must be recalled that in neither C v. D nor Sulamérica did the court find an implied choice and that the implied choice and closest and most real connection tests have, for most practical purposes, merged: Amin Rasheed Shipping Corp. v. Kuwait Insurance Co. If any implication is to be drawn, then in light of the Model Law, NYC and orthodox private international law, the implication should favor the seat theory rather than the host theory. It follows that in most cases the law will be ascertained by the closest and most real connection and that will invariably result in the governing law being that of the country where the seat is. Such a result has sound policy reasons to support it and is consistent with the majority approach in other countries. POSTSCRIPT Since writing this article the author has had sight of a draft of the LCIA s new Rules. They include that The law applicable to the Arbitration Agreement... shall be the law applicable at the seat of the seat of the arbitration. The fact that one of the major arbitral institutions deems it necessary to provide for the law of the arbitration agreement illustrates that the controversy continues. That it has opted for the law of the seat rather than that of the host contract supports the reasoning in the article.

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